Tongaat Hulett is making progress in turning around its business but it may have to make some difficult decisions further down the road as it seeks to reduce a debt pile that still dwarfs its market capitalisation.
Gavin Hudson, the former SABMiller executive brought in as CEO in February 2019, says these decisions may include a rights issue on its own, or one underpinned by a strategic investor, or, as a last resort, the sale of assets that could break up the group.
Rob Aitken, appointed as financial director in March 2019, says one factor in the group's favour is that it has a long time horizon - about three years - to make the best possible decision for shareholders thanks to refinancing agreements it has reached with its lenders.
The group, which has a market capitalisation of about R1bn, reported results for the year ended March 31 showing it had managed to slash its debt by 42% to about R6.6bn from R11.35bn through a combination of a "successful conclusion of several asset disposals as well as reduced costs and improvements to the working capital cycle".
R6.6 bn
Tongaat Hulett’s debt at end-March, from R11.35bn a year before
Its plan now is to reduce debt by a further R3.2bn over the next 18 to 24 months to get it on a more stable footing.
Protea Capital Management analyst Richard Cheesman says Tongaat is "not out of the woods yet".
"The company is still pushing the can down the road. While the banks have agreed to extend the debt, Tongaat hasn't said on what terms it will be extended. The pricing is not yet known, so we will have to see if the interest rate is palatable. The financing side of the business is challenging; how the company is dealing with its lenders, and if it will need to raise capital," says Cheesman.
Aitken says while the refinancing of debt hasn't been priced yet it would be decided through a "competitive market process" that could well result in Tongaat receiving better terms than it currently has, at least so long as its debt reduction plans remain on track.
Hudson says while the group has comparatively "fewer levers" to pull than it did about two years ago when it comes to reducing debt further, the relatively long time frames it has means it won't be rushed into making any decisions. He also says any further asset sales would have to be core ones and that the group is not keen on this as it wants to keep Tongaat intact.
"This is not our first choice - we are a formidable sugar business with three big businesses in South Africa, Mozambique and Zimbabwe and a nice packing house in Botswana. And to take off one of those legs would result in us entering a limping phase, and we don't want to do that."
Hudson says there is also strong growth potential in the sugar market in the rest of Africa, and because of existing operations in SA and elsewhere, Tongaat Hulett has "the potential to grow into parts of Africa where there is a sugar deficit".
He says whatever decisions the group makes, these are "big levers" and "not flippant decisions".
If the group has to approach its shareholders to support a rights issue "we need to have a decent equity story to sell to shareholders".
"We understand the shape of the business now and we know what makes it tick. We are feeling more confident about having to go to our shareholders."
Another possibility, which could provide shareholders with a "soft landing", would be if a strategic investor could be brought in to underwrite the rights offer or bring in capital to reduce debt.
On the continuing regulatory, criminal and civil investigations into former executives who presided over accounting irregularities at the group, Tongaat says it has "submitted all relevant information" to the relevant authorities. It "continues to co-operate with regulators in South Africa and Zimbabwe to assist with the criminal investigations and civil claims against former executives with regards" to a forensic investigation by PwC.
Hudson appointed PwC in 2019 to investigate past accounting practices at the group, which uncovered widespread irregularities and misleading information that was released to shareholders over the years.
The JSE has fined Tongaat R7.5m for publishing financial results between 2011 and 2018 that misled shareholders.
Tongaat said late last year no quantum had yet been given in its civil claims against the executives, among them former CEO Peter Staude, but that it was unlikely to be large enough to claw back the billions of rands estimated to have been lost over the years through accounting irregularities.
Its headline loss widened significantly to about R1.1bn in the year to end-March from R285m in the previous financial year, with it saying hyperinflation in Zimbabwe had contributed significantly. Among other factors, the group's "South African sugar operation's performance was . marred by a once-off refinery loss".
This stemmed from a decision to ramp up the local refinery output in response to significantly higher demand, it said. "This decision increased our local sugar production by 39% over the annual plan to exceed some 450,000 tons.
"While this improved local supply and mitigated potential deep-sea imports, this extra throughput pressured the refinery, leading to increased production costs and process inefficiencies that resulted in a loss of some 27,000 tons of sugar."
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